Euro watches Portugal flop and ECB fight inflation

No amount of German growth will ever prove sufficiently strong to offer support to the Portuguese nation. Yet the sharp recovery in the heartland of Europe has been accompanied by typical price pressures associated with this stage of a recovery. Such pressure is not to be tolerated according to the ECB's manuscript and as a result the central banker today closed the door on its era of uncomfortably loose monetary policy. In turn another door is pushed open wider reminding governments around the region that underlying structural problems are not the worry of monetary policy.

Euro – The ECB press conference will likely be more of a driver than the earlier confirmation of a quarter-point in its short-term interest rate. Critical for the path of the euro going forward is the Bank’s game plan and its attitude to further monetary tightening. The answer investors are looking for is the Bank’s expectation over how much further it needs to raise rates to combat inflationary pressures currently running at a 2.6% pace. Prior to now Mr. Trichet has told us not to expect a string of rate increases, but we’ll wait to see how this meshes in with what is essentially a normalization of monetary policy. The euro fell overnight in response to the official Portuguese request for financial assistance from its partners. The projected demand could top €75 billion ($107 billion). The single currency remains lower at $1.4296 ahead of the Frankfurt press conference.

Japanese yen – The Bank of Japan maintained its asset purchase plan and near-zero benchmark rate of interest. The yen rebounded as technicians shouted out about oversold conditions for the unit having fallen by 7.5% since the peak of the buying frenzy a week after the earthquake struck. The Bank also said it would provide one-year loans of $12 billion to aid companies suffering as a result of the disaster. The yen rose to ¥84.91 before the dollar got its walking boots back on, pushing the unit back to ¥85.26.

British pound – The Bank of England maintained its stance at the April monetary policy meeting and in the process shaved a half cent of the pound’s value against the greenback. The pound remains lower on the session at $1.6314 as dealers await a prompt from the euro on direction for the rest of the week. Against the euro the pound rose slightly to 87.66 pence.

U.S. Dollar – The dollar remains lowly for the week but on a basket basis has rebounded a little on Thursday. The index stands at 75.65 after initial benefit claims fell by 10,000 to 382,000 through last weekend. Investors have become accustomed to a number below the 400,000 mark associated with net employment growth. Yet given the stance of key FOMC members who would prefer to see a stronger job market recovery, the dollar is not benefitting from the incremental improvement in the data. Few are willing to drag forward closure to monetary stimulus based on the borderline numbers.

Aussie dollar – The Aussie accelerated its recent string of strong performances after rude health in employment data for March. Employers added both full and part-time jobs lifting the net increase by 37,800 positions following a decline of 8,600 jobs in February. The dip to 4.9% in the headline rate of unemployment boosted the Aussie to $1.0504 for a fresh all-time high against the greenback. The Aussie has subsequently slipped to $1.0475 as profit-taking sets in. Against the Japanese unit it rose to a 20-month high where it buys ¥89.30.

Canadian dollar – Although risk appetite remains firm the Canadian dollar is running out of room to the upside for fear of dampening economic activity. A February building permits survey released earlier showed a 9.9% increase indicating ongoing health in the domestic construction market. Although the loonie remains higher, it’s struggling to breach its midweek four-year high against the greenback. Today the Canadian dollar trades at $1.0397 U.S. cents.

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About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.